M
OTIVES FOR SUSTAINABLE CAPITAL BUDGETING
:
A CULTURAL
AND INSTITUTIONAL PERSPECTIVE
By Riemer Looijenga
S2366266
r.j.looijenga@student.rug.nl
University of Groningen Faculty of Economics and Business
MSc Business Administration, Organizational and Management Control
June 25th , 2018 Supervisor: dr. J.S. Gusc Co-assessor: dr. A. Bellisario
Word count: 12445
ABSTRACT
Purpose – The purpose of this study is to examine what factors affect the inclusion of sustainability in the capital budgeting process. This is done by analyzing the sustainability of capital budgeting from a comparative perspective in which both cultural and institutional perspectives are used.
Design/methodology – The paper relies on quantitative data collected through multiple databases and uses a multiple hierarchical regression analysis to test the hypothesized effects. The final sample includes 2,640 organizations from 39 countries.
Findings – The main findings reveal that different cultural characteristics allow organizations to become accustomed to maintaining a lower level of sustainable capital budgeting or, in contrast, to force organizations to engage more in sustainable capital budgeting. Also, an un-hypothesized effect indicates that organizations not necessarily engage in sustainable capital budgeting practices as a response a sustainability ranking but use greenwashing as a response to the pressure exerted by the ranking. Further research is necessary to examine the relation between internal sustainability improvements and greenwashing as a response to pressure from rankings.
Research implications/limitations – The findings indicate that capital budgeting practices are not simply transferable and organizations must consider different cultural expectations about sustainability. The negative impact of the sustainability ranking indicates that policymakers should search for alternatives to stimulate sustainability in capital budgeting.
1
C
ONTENT
1. Introduction ... 2
2. Theoretical background ... 4
2.1 Why capital budgeting? ... 4
2.2 Capital budgeting and culture... 6
2.3 Institutional theory ... 7
3. Hypotheses development ... 9
3.1 Divergence of capital budgeting practices: culture ... 9
3.2 Convergence in capital budgeting practices: sustainability ranking ... 11
3.3 Conceptual model ... 12
4. Methodology ... 13
4.1 Sample and data collection ... 13
4.2 Measurement of variables ... 13
5. Results ... 15
6. Discussion ... 18
7. Conclusion and final remarks ... 20
7.1 Implications ... 20
7.2 Limitations and future research ... 21
Bibliography ... 22
Appendices ... 29
Appendix A: Overview ROSDI factors ... 29
Appendix B: Comprehensive overview ROSDI factors ... 31
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1.
I
NTRODUCTION
Globalization has significantly altered the world economy, transforming it into a complex web of global value chains (Kaltegger, Löschel, & Pothen, 2017; Los, Timmer, & de Vries, 2015; Johnson, 2014). Around the year 2000, many people believed that globalization and the rise of so-called “global companies” would wipe out national differences and that the success of companies around the world would depend on how closely they followed the American example (Hofstede, 2009). In hindsight, this was rather naïve since countries’ business leaders share the culture of their national society which are rooted in national cultures. In line with a world where organizations act more and more on a global scale, many researchers (Andor, Mohaty, & Toth, 2015; Budhwar & Sparrow, 2002; Chow, Kato, & Merchant, 1996; Jansen, Merchant, & van der Stede, 2008; Newman & Nollen, 1996; Otley D. T., 1980; Sheridan, 1995; Tallaki & Bracci, 2015; Vachon, 2010) got interested in comparative management accounting (CMA) and focused on whether management accounting (MA) practices are affected by cross-national differences. The main argument in this stream of literature is that national differences are important in shaping management practices and that something that works in one country does not necessarily work in another (Budhwar & Sparrow, 2002). If this is indeed true, then organizations should adapt/adopt practices that fit best with the national culture.
3 Granlund and Lukka (1998) argue that the influence of culture as a contingency factor is declining and suggest that a trend is evolving towards transnational convergence of management accounting driven by institutional pressures. Still, limited empirical evidence has been provided of this development (Endenich, Brandau, & Hoffjan, 2011). This paper aims to address this void by analyzing sustainability in capital budgeting from a comparative perspective in which both cultural and institutional perspectives are used to test the hypotheses. Endenich, Brandau & Hoffjan (2011) call for further research on CMA because the majority of CMA studies remain exploratory and descriptive. Besides, they argue that most CMA studies are inadequate due to the small numbers of companies included in their samples and lack control for industry. The importance of a comparative study within accounting research is relevant for corporate practice because as a result of globalization, in particular for multinational corporations (MNCs), the right combination of capital budgeting techniques from different countries can generate increased efficiency levels (Shields, Chow, Kato, & Nakagawa, 1991). In this respect, the study is guided by the following question:
What factors influence the inclusion of sustainability-related factors into capital budgeting?
To investigate this question, this study focusses on cultural aspects using the dimensions of Hofstede (1980; 1984; 2018) as explanatory factors and using institutional pressure in the form of a sustainability ranking as a moderating effect. The effect of these variables will be measured on the intensity by which organizations engage in sustainable capital budgeting practices. The data is gathered via a database from Thomson Reuters (ASSET4_ESG) and DataStream. The final sample includes 2,640 organizations from 39 countries. To examine the hypothesized effects, a multiple hierarchical regression was performed. The results reveal that different cultural characteristics allow organizations to become accustomed to maintaining a lower level of sustainability in capital budgeting or, in contrast, force organizations to engage more in sustainable capital budgeting. Additionally, an unhypothesized negative effect was found between institutional pressure and the sustainability of capital budgeting. Preliminary evidence suggests that organizations do not automatically respond internally to the pressure of a ranking, however, to remain legitimate they potentially engage in loose coupling/greenwashing. As a result, organizations are not per se moving towards a broader sustainable perspective on capital budgeting but primarily try to remain legitimate in the eyes of the stakeholders. Further research is required to examine the relation between internal sustainability improvements and greenwashing as a response to institutional pressure.
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2.
T
HEORETICAL BACKGROUND
2.1 Why capital budgeting?
From a global perspective, no other issue is as important as sustainability (Khan , 2014). Sustainability has drawn the attention of people all around the world that we share the globe despite differences in culture, economics and ideologies. Globalization reduced the distance between organizations and various stakeholders from different countries and increased the interconnectedness between societies in different parts of the world (Oladimeji, Ebodaghe, & Shobayo, 2017). As a result, stakeholders from all over the world began to exert more and more pressure on organizations to require them to behave in environmentally-friendly ways to allow humanity to stay within the planetary boundaries (Cerin, 2002; Heede, 2014). Since capital budgeting decisions are concerned with projects that are expected to enhance value and provide benefits to organizations and communities over a longer period of time, it is expected to see signs of sustainability in capital budgeting.
2.1.1 The narrow financial view of traditional capital budgeting
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2.1.2 The broader view on sustainability in capital budgeting
It becomes apparent that current capital budgeting methods for analyzing the sustainability of investments are insufficient in measuring sustainability because of their narrow financial perspective. It is argued that the traditional objective of capital budgeting (i.e. maximizing firm value) should be left behind and that criteria should be chosen that are relevant to today’s challenges. To do this, prior research (Larcker, 1981; Turner & Coote, 2018) showed that organizations sometimes combine qualitative data and non-financial factors in capital budgeting decisions along-side the quantitative techniques. However, this makes the capital budgeting process an extremely complex process, one which requires the proper sophisticated tools (Tyler & Chivaka, 2011; Chittenden & Derregia, 2015). Even though efforts are made regarding the inclusion of sustainability-related factors in the capital budgeting process, it still tends to promote calculations (Vesty, Oliver, & Brooks, 2013). As a consequence, in most cases only those factors are included that are direct financial or those that are easily quantifiable. Thus, as highlighted by both Richardson (2009) and Hoechstaedter and Scheck (2015), there is a necessity for a stronger ethical foundation in traditional financial methods and tools to contribute more to sustainability. “Decision-makers need to recognize, and account for, all costs and benefits before adopting a project” (Fatemi & Fooladi, 2013, p. 105).
Product costing methodologies such as life-cycle costing, cost-benefit analysis and full environmental cost accounting can be classified under the overarching term of Environmental Management Accounting (EMA) and provide broader methods to calculate the sustainability in relation to the life-cycle of a capital project (Jasinski, Meredith, & Kirwan, 2015). A specific model for capital budgeting that considers the broader perspective and discloses additional environmental and social factors is the Return on Sustainable Development Investment (ROSDI) (Lambregts, 2016). It is an advanced method that captures the sustainability of an investment based on a number of economic, social and ecological criteria (triple bottom line perspective (Elkington, 1999)). ROSDI not only measures and informs managers about the economic, environmental and social consequences of their decisions within the organization but also takes into account a number of externality costs1. It hereby takes a more stakeholder approach that uses the monetization of externality costs to include both internal and external factors. Because ROSDI is measured in terms of return rather than costs, the results can easily be compared to other (similar) MA models and tools.
The model is however not free of disadvantages/challenges. The attempt to the monetization of non-economic values (i.e. placing money values on human life) may be perceived as dehumanizing. The fear is that “monetization will lead to all activities becoming socially constructed as “economic” and, relatedly, that all valued things will be regarded as substitutable” (Bebbington, Brown, & Frame, 2007, p. 226). Overemphasis on monetary measures of such impact can lead to an incomplete picture of
1 Externality costs are consequences of corporate actions that affect other parties without being reflecting in the
6 opportunities and risks (Schaltegger & Burritt, 2010). Besides, ROSDI has not been validated in prior research. Since it is not known what sustainability looks like, one can only produce an account of unsustainability (Bebbington & Gray, 2001). ROSDI is just one attempt to capture the sustainability of capital budgeting and is not necessarily the best model. Regardless of its challenges however, by using ROSDI, this study addresses the question of Steen (1999), who argues that the scientific community should further validate, accept or reject sustainability models. Hence, regardless of these challenges, ROSDI seems a usable instrument for demonstrating a broader perspective on capital budgeting.
2.2 Capital budgeting and culture
Research has shown that accounting practices follow different patterns in different parts of the world (Shields, Chow, Kato, & Nakagawa, 1991; Andor, Mohaty, & Toth, 2015). The predominant theoretical approaches in this context are contingency frameworks in which the assumption is made that effective accounting can only be guaranteed through adjustments to specific contingency factors (Chow, Shields, & Wu, 1999; Granlund & Lukka, 1998; van der Stede, 2017; Otley D. T., 1980). Accordingly, a significant portion of research analyzes the influence of culture on MA practices. To identify culture, most CMA literature relies on the framework of Hofstede (1980; 1984) (Chow, Shields, & Wu, 1999; Endenich, Brandau, & Hoffjan, 2011; Ueno & Sekaran, 1992), even though the Hofstede typology is not free of criticism (e.g. McSweeney (2002)). Hofstede (1980, p. 25) defined culture as “the collective mental programming of the mind which distinguishes the members of one human group from another”. His extensive research was aimed at detecting elements of a society’s culture, the values of its inhabitants and how these values relate to behavior. In his early work, Hofstede (1980) identified differences in national culture on four primary dimensions: power distance, individualism, uncertainty avoidance and masculinity. Additional research led Hofstede to add long-term orientation (also referred to as Confucian dynamism) and indulgence to his model.
If societal values are related to the development of accounting systems (accounting as a subculture), assuming that these values permeate a nation’s social system, there is a match between culture and accounting systems (Gray, 1988). Van der Stede (2003) argues that the efficiency/effectiveness of an MA practice can be guaranteed only through adjustment to specific parameters of the country or the environment. An important factor that determines whether MA practices are perceived as effective is whether the organizational members perceive them as culturally appropriate. More specifically, MA practices are influenced by human behavior and the interaction among employees, thus it is likely that MA practices are affected by national culture (Otley D. T., 1978; van der Stede, 2003). This is consistent with Graham and Sathye (2017), who found that cultural traits influences the way people organize the capital budgeting process.
7 behavior, providing them a dominant rationality” (Gallego-Álvarez & Ortas, 2017, p. 339), explaining that the preference of stakeholders can be influenced by culture. Su (2006) shows that the influence of culture is important when it comes to the decision-making processes of organizations and the influence it has on managerial behavior. This is because organizations operating in different cultural settings will be less or more forced to adopt sustainable behavior (Richardson & Boyd, 2005), because cultures hold different and/or conflicting perceptions of what is considered “good” or “bad” in terms of sustainability. So, culture influencing stakeholders’ perception about the importance of sustainability has its impact on corporate attitudes and practices and the way in which organizations include sustainability in their capital budgeting. If cultural differences indeed appear to be of significant importance in shaping sustainability in capital budgeting, then it could be expected that organizations should adopt capital budgeting practices that best fit the national culture causing such practices, from a global perspective, to diverge (Budhwar & Sparrow, 2002).
2.3 Institutional theory
In contrast to what is discussed above, there is also the possibility for arguments that support the convergence of management practices. The core of this argument is that there are certain management practices that are universal and regarded as global best practice that are used regardless of geographical location or culture. In explaining this, I built on institutional theory that finds its origin in the work of DiMaggio and Powell (1983). The basic assumption of institutional theory proposes that an organization’s tendency towards conformity to norms, traditions and social influence in their institutional environment will lead to homogeneity amongst organizations both in structure and practice (Carpenter & Feroz, 2001; DiMaggio & Powell, 1983). Organizations that successfully execute this are those organizations that acquire support and legitimacy by conforming to these institutional pressures. Thus, the adaptive pressure that is placed on MA by institutional norms and standards can explain the convergence of MA practices.
DiMaggio and Powell (1983) describe the concept of institutional isomorphism which refers to the process by which organizations tend to adopt the same norms, structures and practices that are established and institutionalized over time within a particular environment. This process of homogeneity occurs through three isomorphic mechanisms:
• Coercive isomorphism: results from both formal and informal pressure exerted on organizations by governmental mandates or dependency on key organizations (DiMaggio & Powell, 1983; Li & Ding, 2013).
8 • Normative isomorphism: stems from professionalization (DiMaggio & Powell, 1983; Larson, 1991). “It comes from the common cognitive base of shared understanding and definition of the norms and legitimized actions within a profession” (Li & Ding, 2013, p. 511).
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3.
H
YPOTHESES DEVELOPMENT
In light of what is previously discussed it has become apparent that with globalization, the motives to include sustainability in capital budgeting vary. In this chapter, arguments are presented that demonstrate that different cultures hold different and/or conflicting perceptions of what is considered “good” or “bad” in terms of sustainability which might result in diverging capital budgeting practices. Arguments are also presented that state that globalization can cause convergence of sustainable capital budgeting practices as a result of the institutional pressure that is derived from a sustainability ranking.
3.1 Divergence of capital budgeting practices: culture
3.1.1 Power distance
Power distance describes the extent to which the less powerful members of institutions and organizations within a country expect and accept that power is distributed unequally (Hofstede, 1980; Gray, 1988). High power distance implies inequality and can manifest itself in areas such as pay, status, distribution of power and rights. Superiors in high power distance cultures tend to make unilateral decisions causing less participation of subordinates; it reduces dialogue between management and subordinate (Chow, Shields, & Wu, 1999). In contrast, Hofstede (1984) argues that low power distance entails preference for more equality in vertical relationships implying that people prefer or expect to be involved in the organizations decision-making process rather than simply doing what is told. These cultural traits have implications for the way sustainability is included in capital budgeting. Sustainable capital budgeting decisions are characterized by high levels of complexity suggesting that dialogue, involvement and professional judgement in the capital budgeting process are required to deal with this complexity (Gray, 1988; Sawers, 2005). Thus, sustainable capital budgeting requires multilateral decision-making using more advanced tools in a decentralized manner (i.e. more equality in the vertical relation) in order to deal with the complexity, a characteristic of a low power distance culture. Based on these theoretical arguments, the following hypothesis is established:
H1a: A high level of power distance is negatively related to sustainability in capital budgeting.
3.1.2 Individualism vs. collectivism
10 generations. These cultural traits influence the capital budgeting process. Graham & Sathye (2017) reveal instances in which individualism inhibited the use of sophisticated capital budgeting tools, in particular, Australian organizations relied heavily on individual assertiveness when faced with extreme uncertainty. Thus, sophisticated capital budgeting tools that incorporate sustainability are expected to be used in collectivist cultures to facilitate united decision-making and to mitigate risk because it is essential for collectivists societies to maintain social harmony. Hence, the following hypothesis is proposed:
H1b: Individualism is negatively related to the sustainability in capital budgeting.
3.1.3 Masculinity vs. femininity
Masculinity encompasses assertiveness, the acquisition of money and things and not caring for others, the quality of life or people. What is fundamental in this dimension, is what motivates people: wanting to be the best (masculinity) or liking what you do (femininity) (Hofstede, Hofstede, & Minkov, 2010). Hofstede (1984) states that masculinity is associated with a performance society in which competitiveness between people is a good thing; the strong should win. Femininity stands for “a preference for relationships, modesty, caring for the weak and the quality of life” (Hofstede, 1984, p. 84). These aspects influence the inclusion of sustainability in capital budgeting. It is argued that reasons not to include sustainability-related issues in capital budgeting could be caused by the fact that they are perceived to be corporate-wide issues, rather than specific to individual projects (Vesty, Oliver, & Brooks, 2013). This is sometimes referred to as “environmental cynicism” (Kroesen, 2013) in which people hold an attitude of “this is not my job”, which is reflected in the performance society, a characteristic of a masculine culture. Combining this information, the following hypothesis is proposed for testing.
H1c: Masculinity is negatively related to sustainability in capital budgeting.
3.1.4 Uncertainty avoidance
Cultures that are highly avoiding uncertainty feel threatened by uncertainty and unknown situations. Societies displaying high levels of uncertainty tend to maintain rigid codes and tend to impose more rules on individuals to deal with this uncertainty. For organizations, operating in a high uncertainty culture means the inability to anticipate and prepare for future ambiguous situations. In addition, companies experiencing high levels of uncertainty avoidance tend to avoid change and innovation (Vachon, 2010). Including sustainability-related factors in the capital budgeting decisions makes it a complex process. Therefore, it is expected that organizations operating in cultures characterized by high levels of uncertainty avoidance will use more advanced capital budgeting tools that include sustainability-related factors to cope with these high levels of uncertainty. The following hypothesis will be tested:
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3.1.5 Long-term orientation
Long-term orientation describes how every society has to maintain some links with its own past while dealing with challenges of the present and future (Hofstede, 1980). Those with a high score on this dimension (i.e. a long term orientation) take a pragmatic approach: they encourage thrift as a way to prepare for the future. Organizations operating in a culture characterized by a long-term orientation primarily focus on accountability principles and on achieving long-term financial and non-financial objectives (Hofstede, Hofstede, & Minkov, 2010). Consistent with the definition of the UNWCED (1987), because they consider the needs of the present without compromising the ability of future generations to meet their own needs, cultures that are long-term oriented are expected to care more for sustainability. This is consistent with the conclusion of Hackert, Krymwiede, Tokle and Vokurke (2012) who found that investments in pollution prevention, recycling activities and waste reduction were primarily executed by organizations who operated in a culture that was characterized by a long-term orientation. Bringing this together results in the following hypothesis:
H1e: A long-term orientation is positively related to sustainability in capital budgeting.
3.1.6 Indulgence vs. restraint
Indulgence stands for a society that allows relative free satisfaction of human needs. In contrast, restraint describes a society that suppresses the free satisfaction of human needs and regulates it by strict social norms (Hofstede, 1980). It is argued by Ismail and Lu (2014, p. 45) that “people in indulgence societies prefer happiness and tend to create a perception of freedom, health, and control over life. Its opposite pole, restraint culture, refers to a society which controls the gratification of desires and feelings”. Indulgent societies should by definition be engaged in sustainable capital budgeting practices as a result of the intrinsic motivation of the organizational members. De Young (1986) describes that people obtain personal satisfaction from the engagement in sustainable activities such as recycling and reusing materials, regardless of the external motivation. So, from this we can deduce that people engaging in sustainable capital budgeting are intrinsically motivated to do so because it gives them the perception of freedom, personal satisfaction and control over life. Taken this into consideration, the following hypothesis is developed:
H1f: Indulgence is positively related to sustainability in capital budgeting.
3.2 Convergence in capital budgeting practices: sustainability ranking
12 configuration of MA systems”. Rankings recently emerged a source of institutional pressure (Martins, 2005). Rankings encourage organizations to continuously remain its current position which forces organizations to change to the criteria of the ranking and constraining organizations to focus on their predetermined strategic goals. Thus, the ranking eventually forces organizations to focus their practices around the criteria from the ranking rather than their own strategic goals, thereby overruling the predominant rationality that is rooted in the cultural characteristics (Parboteeah & Cullen, 2003). Taken together, this results in the following hypothesis:
H2: The sustainability ranking is negatively moderating the relationship between the cultural
characteristics and the sustainability in capital budgeting, such that the relationship between the cultural characteristics and the sustainability in capital budgeting is weaker.
3.3 Conceptual model
Intensity of sustainability in capital budgeting Control variables National characteristics Sustainability ranking H1a-f H213
4.
M
ETHODOLOGY
4.1 Sample and data collection
The sample required for testing was constructed using information from multiple databases. The data for the dependent variable, the moderator variable and a control variable were obtained from Thomson Reuters Inc. (ASSET4_ESG); a database that has been validated in prior literature (Hawn & Ioannou, 2016). ASSET4_ESG provides objective, relevant, auditable and systematic corporate social responsibility (CSR) information which is used by professional investors who build their portfolios by integrating CSR data into their traditional investment analysis. Research analysts of ASSET4_ESG collect around 900 data points per firm based on information that is objective and publicly available such as financial and nonfinancial annual reports, nongovernmental organizations’ websites and stock exchange filings. Organization specific data such as name, ISIN code, location and industry (ICB-code) were collected from DataStream. In addition, data was obtained from the website of Geert Hofstede (2018). This dataset provided an overview of 112 country scores on the six cultural dimensions. The initial sample contained a total of 5,955 organizations. 3,215 items had to be dropped because of missing data leaving a total of 2,740 organizations in the sample. Further refinement was needed because it appeared that for some countries no Hofstede scores were available, shrinking the sample with an additional 97 items. The final sample included 2,643 unique publicly-traded organizations across 39 different countries in the year 2016. Although a significant portion of the organizations originates from the U.S.A, Australia, Canada and Japan, many come from continental Europe, Singapore, Hong Kong and the BRIC countries.
4.2 Measurement of variables
4.2.1 Dependent variable
The dependent variable was the sustainability in capital budgeting. This was measured by the Return on Sustainable Development Investment (ROSDI), a model by Lambregts (2016). The measuring of the ROSDI occurred on seven ecological factors, five social factors and three financial factors (based on
triple bottom line). The environmental and social factors were gathered as dichotomous data and the
financial by ratio. Since the interest of this study lied in whether a factor was included (i.e. yes or no) in a capital budgeting decision rather than the level of the activity/factor, the data was transposed to dichotomous data. All categories have the same weight, consistent with the Brundland Report, (United Nations World Commision on Environment and Development (UNWCED), 1987) therefore making it suitable to transform the data into a ratio scale to express it as a percentage. The complete list of all the factors can be found in appendix A. From here on forward, it is referred to as the intensity of
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4.2.2 Independent variables
Culture has been conceptualized in many different ways and it is found that in order to operationalize the concept of culture, the best way to do this is to use dimensions of cultural differences (Endenich, Brandau, & Hoffjan, 2011). The dimensions of Hofstede (1980; 2009) are credible and widely used as a way to frame culture, especially in CMA (Chow, Kato, & Merchant, 1996; Endenich, Brandau, & Hoffjan, 2011; Ueno & Sekaran, 1992). The independent variables in this research were therefore the following six dimensions: power distance, individualism, masculinity, uncertainty avoidance, long-term orientation and indulgence. These dimensions are originally measured by Hofstede (1980; 2009), using surveys based on 42 paired questions on a five-point Likert scale. The scores are measured on a ratio scale from 0-100.
4.2.3 Moderator
Following the article of Martins (2005), institutional pressure will be measured by a ranking since rankings have emerged as an important source of institutional pressure on organizations. The ranking that is suitable for this research is the ESG Controversies score. It measures an organizations’ exposure to environmental, social and governance (ESG) controversies and negative events that are reflected in global media and ranks it accordingly on a ratio scale. The ESG Controversies score encompasses five pillars (environment, customer, human rights & community, labor rights & supply chain and governance) including 23 indicators in total. For the purpose of this study, only the ranking on the ESG Controversies ranking was used. This measure was lagged by a year. From here on forward, it is referred to as sustainability ranking.
4.2.4 Control variables
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5.
R
ESULTS
A multiple hierarchical regression is performed to examine the hypothesized effects of the dimensions of Hofstede on the intensity in use of sustainability criteria in long-term decision-making. In addition, the moderation effect of a sustainability ranking is examined. Before conducting the regression analysis, several assumptions are tested. First, the data is tested for normality and homoscedasticity. The Q-Q plot and the histogram show that the values generally follow the normality line thus the assumption is made that the data is approximately normally distributed. In addition, the scatterplot shows that residuals are randomly scattered across the horizontal line thus homoscedastic data is assumed. Second, the data is checked for outliers with the residual plot because they can lead to misinterpretations. The residual statistics show a std. residual of min -3.045 and max 2.922 after deleting three cases from the sample. The P-P plot showed that the residuals are approximately normally distributed. Third, the assumption for multicollinearity is tested. The centering procedure by Aiken and West (1991) for regression analysis using interaction terms is followed. To avoid problems of multicollinearity in the multiple regression analysis, the variables are mean-centered before the interaction terms are added to the model. Collinearity diagnostics using variance inflation factor (VIF) and the tolerance levels indicate no multicollinearity problems in the hierarchical regression analysis. None of the above mentioned assumptions is violated, therefore the data is suitable for testing.
Table 1. Descriptive statistics and correlations
Mean S.D. Min Max 1 2 3 4 5 6 7 8
1. Intensity .552311 .2091 0.000 1.000 2. Power distance 47.93 15.559 11 100 .164*** 3. Individualism 68.07 26.106 14 91 -.188*** -.779*** 4. Masculinity 59.65 17.195 5 95 .012 -.022 .060*** 5. Unc. avoidance 55.15 20.357 8 100 .227*** .283*** -.370*** .288*** 6. LT-Orientation 48.29 24.901 21 100 .257*** .424*** -.708*** .223*** .517*** 7. Indulgence 57.05 16.861 17 97 -.188*** -.695*** .773*** -.116*** -.332*** -.706*** 8. Sust. ranking 47.1761 20.09 0.17 70.59 -.224*** .057*** -.093*** -.033 .026 .028 -.036 9. Board size 9.68 3.052 3 25 .385*** .161*** -.113*** .073*** .179*** .149*** -.189*** -.122*** Notes. N = 2640; *p < .10; **p < .05, ***p < .01; Industry statistics in appendix C
-16 .224, p < .01). In terms of control variables, board size shows significant positive correlation (r = .385, p < .01) to the intensity of sustainability in capital budgeting. The industry statistics (appendix C) show six significant correlations between industry type and the intensity of sustainability in capital budgeting: consumer goods (r = .130, p < .01), healthcare (r = -.057, p < .01), consumer service (r = -.054, p < .01), utilities (r = .128, p < .01), financials (r = -.071, p < .01) and technology (r = -.065, p < .01).
Table 2. Results of the Hierarchical Regression Analysis
Dependent variable: intensity of sustainability in capital budgeting (in percentage)
Model 1 Model 2 Model 3 Model 4
Intercept .262*** .293*** .309*** .310***
Control variable
Industry Yes Yes Yes Yes
Board size .367*** .333*** .308*** .306*** Independent variable Power distance .073** .066** .067** Individualism .091** .053 .063 Masculinity -.096*** -.097*** -.097*** Uncertainty avoidance .082*** .089*** .090*** Long-term orientation .256*** .240*** .242*** Indulgence .072** .076** .072** Moderator variable Sustainability ranking -.196*** -.189*** Interaction terms Sustainability ranking × power distance -.014 Sustainability ranking × individualism -.050 Sustainability ranking × masculinity -.026 Sustainability ranking × uncertainty avoidance .023 Sustainability ranking × long-term orientation -.002 Sustainability ranking × indulgence .009 R² .181 .230 .267 .270 Adjusted R² .178 .226 .263 .263 R² change .049 .037 .003 Notes. N = 2640; *p < .10; **p < .05, ***p < .01;
17 Table 2 shows the results of the hierarchical regression analysis. The variables were entered into the regression analysis in four steps (Aiken & West, 1991; Martins, 2005): the control variables were entered in the first step (model 1), the independent variables were added in the second step (model 2), the moderator variable was added in the third step (model 3) and the interaction variables were obtained by multiplying the independent variables by the moderator variable in the fourth step (model 4).
Table 3 summarizes the results of the regression analysis and shows mixed results. Hypotheses 1a (β = .073, p < .05) and 1b (β = .091, p < .05) find no support for the hypothesizes relationships (model 2). Hypotheses 1c (β = -.096, p < .01), 1d (β = .082, p < .01), 1e (β = .256, p < .01) and 1f (β = .072, p < .05) find the expected support for their corresponding hypotheses (model 2). The full model (model 4) used to test the interaction effects of the moderator shows no significant results for the moderation effect of the sustainability ranking.
All models show significant results for the control variable board size. In appendix C (model 1), the results on the control variable industry show that on average the industries basic materials (β = .114, p < .01), industrials (β = .113, p < .01), consumer goods (β = .159, p < .01) and utilities (β = .131, p < .01) have a higher intensity of sustainability in their capital budgeting than the oil & gas industry. The financial sector shows a significant negative relation (β = -.043, p < .05).
Overall, the regression model finds mixed support for the hypotheses. In addition to the hypothesized relationships, one significant un-hypothesized direct effect of the moderator is observed as a result of following the Aiken and West (1991) method for building the regression model (table 3, model 3): the sustainability ranking appears to be negatively related to the intensity of sustainability criteria in capital budgeting (β = -.196, p < .01).
Table 3. Summary of the expected and observed results
Variable Model Hypothesis Expected effect Observed effect Observed coefficient
Power distance 2 H1a negative positive .073**
Individualism 2 H1b negative positive .091**
Masculinity 2 H1c negative negative .096***
Uncertainty avoidance 2 H1d positive positive .082***
Long-term orientation 2 H1e positive positive .256***
Indulgence 2 H1f positive positive .072**
Sustainability ranking (moderator) 4 H2 negative ns ns
Sustainability ranking (IV) 3 unhypothesized - negative -.196** Note: *p < .10; **p < .05, ***p < .01, ns: not significant, reported beta coefficients are standardized
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6.
D
ISCUSSION
The purpose of this study was to examine the effects of culture and institutional pressure on sustainability in capital budgeting causing respectively diverging or converging capital budgeting practices. The study examined the relationships of Hofstede’s cultural dimensions and the moderating effect of a sustainability ranking on the way organizations include sustainability in their capital budgeting. In this section, I discuss the findings and draw on additional studies to explain results contradicting the hypothesized relationships.
The findings indicate that high levels of power distance are positively related to the intensity of sustainability in capital budgeting, contrary to what was expected. A possible explanation for the observed result could be that governments in high power distance culture tend to impose more environmental regulation and stricter enforcement of this regulation of organizations thereby forcing them to include sustainability-related factors into their capital budgeting (Ho, Wang, & Vitell, 2012).
In contrast to the hypothesis, individualism appears to be positively weak significant related to intensity of sustainability in capital budgeting. The weak impact of individualism seems to be consistent with previous research (Gallego-Álvarez & Ortas, 2017; Park, Russell, & Lee, 2007). A possible explanation for the observed relation could be that organizations operating in a culture that is characterized by high levels of individualism place emphasis on values such as freedom, initiative and professionalism, characteristics that provide ground for organizational behavior that will challenge the status quo (i.e. the traditional proposition of maximizing firm value); therefore employees may be more inclined to push environmental issues on the agenda of organizations (Vachon, 2010).
Consistent with the hypothesis, the results show strong support of the negative relation between masculinity and the intensity of sustainability in capital budgeting. The results are consistent with the findings of Peng and Lin (2009) and Park, Russell, & Lee (2007) and confirm the idea that organizations operating in a feminine culture show more commitment to social awareness and corporate environmental impact, which in turn can explain the use of sustainability in capital budgeting as a consequence of being more environmentally conscious/aware.
As hypothesized, the results show a strong positive significant relation between high levels of uncertainty avoidance and the intensity of sustainability in capital budgeting. The high level of uncertainty that may originate in the information and knowledge about climate change may influence organizations to structure their operations with procedures, rules, norms and more advanced methods that are clear and transparent because organizations fear demonstrations or outcry’s of the public (Vachon, 2010).
19 long-term orientation (pragmatic) are more committed to environmental preservation and thus are more inclined to include sustainability-related factors into the capital budgeting decision.
Consistent with the hypothesis, the results reveal that the intensity of sustainability in capital budgeting is positively affected by high levels of indulgence. Research on the indulgence dimensions is relatively new and scarce so this research adds to the current body of literature by explaining the importance of intrinsic motivation in sustainable behavior. The results corroborate the idea that people in indulgent societies are intrinsically motivated to engage in sustainable behavior because it gives them the perception of freedom, personal satisfaction and control over life (de Young, 1986).
The moderating effects of the sustainability ranking provided no added understanding since none of the interaction effects appear to be significant. Since there is no significant effect, we cannot exclude the possibility of any moderating effects. However, the study reveals that the ranking appears to be direct negative significantly related to the intensity of sustainability in capital budgeting. This shows that the higher the score on the sustainability ranking (i.e. experienced a high number of controversies on ESG-related factors), the lower the intensity of sustainability in capital budgeting. A possible explanation of this can be found in the way organizations respond to rankings (Gioia & Chittipeddi, 1991). Martins (2005) argues that managerial sense-making is important in determining the extent to which organizations conform, or conversely resist, to pressure from a ranking. As a response, people could engage in loose coupling (Orton & Weick, 1990). Cruz, Major and Scapens (2009) argue that loose coupling indicates the separation between systems used to ensure external legitimacy and those used internally by organizations to manage their-day-to-day activities. This could imply that organizations use external sustainability reporting to ensure legitimacy from their external stakeholders while simultaneously organizing their internal practices (i.e. capital budgeting practices) in a different way (also referred to as greenwashing (Seele & Gatti, 2017)). Hence, this could be a possible explanation of the lower intensity of sustainability in capital budgeting.
20
7.
C
ONCLUSION AND FINAL REMARKS
In conclusion, the findings shows that different cultural characteristics allow organizations to become accustomed to maintain a lower level of sustainability in capital budgeting or, in contrast, to force organizations to engage more in sustainability in capital budgeting. Cultures that require organizations to present a proactive attitude towards the inclusion of sustainability-related items in the capital budgeting process are those cultural that show high power distance, high individualism, high levels of masculinity, high levels of uncertainty avoidance, a long-term orientation and high levels of indulgence. This reveals that the inclusion of sustainability-related factors in capital budgeting differs between cultures and might cause sustainable capital budgeting practices to diverge. Furthermore, the paper shows that the institutional pressure derived from a sustainability ranking negatively influences the intensity of sustainability in capital budgeting. Preliminary evidence suggests that organizations are not
per se concerned with moving towards the broader sustainable perspective on capital budgeting but
engage in greenwashing (i.e. they continue using narrow capital budgeting practices) to maintain legitimate (Seele & Gatti, 2017).
Thus, to answer the research question, this paper suggests that different cultural characteristics affect the inclusion of sustainability-related factors in the capital budgeting process while a sustainability ranking not necessarily forces sustainability into capital budgeting. Due to variation in the way organizations handle the pressure derived from rankings, organizations choose to either respond to the ranking by actually changing their capital budgeting practices to be more sustainable and report this (i.e. no greenwashing) or to mislead the public by stating that they make sustainable changes to their capital budgeting process but in fact only report on this (i.e. greenwashing). Further research is necessary to examine the relation between internal sustainability improvements and greenwashing as a response to pressure from rankings.
7.1 Implications
21 external, provided a broad perspective on sustainability in the capital budgeting process and proved to be valuable (even in another form than originally designed).
The findings also have implications for practice. From a perspective of multinational corporations, the impact of culture should not be underestimated. Capital budgeting practices are not simply transferable and organizations must consider aspects of national identify in the expectations about sustainability in capital budgeting (Newman & Nollen, 1996). The findings also show that sustainability rankings, as a motive/tool towards a more sustainable world, are not suitable because they do not necessarily force organizations to behave in more sustainable ways. From a macro-economic perspective, the results provide valuable insights for policymakers such as the EU, UN or NGOs. Knowledge of the influence of cultural factors and the limited influence of sustainability rankings can help them to mitigate deficiencies that may rise amongst organizations from different countries. Alternatively, it can stimulate the development of new ways to enhance the sustainability of organizations.
When matching the country scores of the Hofstede dimensions (2018) with the results of this study, the outcomes approximately correspond to the following countries: Belgium, Luxembourg and France, and to a lesser extent to Spain and Malta. The expectation is that these countries (all EU) stimulate the inclusion of sustainability-related factors in capital budgeting and might take the lead when it comes to developing sophisticated capital budgeting models. As a result, organizations outside these countries who are looking to include sustainability-related items into their capital budgeting might consider models from these countries in their quest of becoming more sustainable.
7.2 Limitations and future research
22
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29
A
PPENDICES
Appendix A: Overview ROSDI factors
Ecology Code Unit Question
Greenhouse gasses ENERO05V(1) ENERO06V(2) ENERO07V(3) ENERO08V(4) ENERO09V(5) Y/N Y/N Y/N Y/N Y/N
1. Does the company show an initiative to reduce, reuse, recycle, substitute, phased out or compensate CO2 equivalents in the production process?
2. Does the company report on initiatives to recycle, reduce, reuse or phase out fluorinated gases such as HFCs (hydrofluorocarbons), PFCs
(perfluorocarbons) or SF6 (Sulphur hexafluoride)? 3. Does the company report on initiatives to reduce, substitute, or phase out ozone-depleting (CFC-11 equivalents, chlorofluorocarbon) substances? 4. Does the company report on initiatives to reduce, reuse, recycle, substitute, or phase out SOx (Sulphur oxides) or NOx (nitrogen oxides) emissions? 5. Does the company report on initiatives to reduce, substitute, or phase out volatile organic compounds (VOC) or particulate matter less than ten microns in diameter (PM10)?
Air pollution ENERDP039 Y/N Does the company report on initiatives to reduce, substitute, or phase out hazardous air pollutants (HAP)?
Water usage & pollution
ENRRDP0011 Y/N Does the company have a policy to improve its water efficiency?
(Ecological) footprint
ENPIDP037 Y/N Does the company claim to evaluate projects on the basis of environmental or biodiversity risks as well? Energy usage &
production
ENPIO02V Y/N Does the company describe initiatives in place to reduce the energy footprint of its products during their use?
Waste/garbage & recycling
ENERO14V Y/N Does the company report on initiatives to recycle, reduce, reuse, substitute, treat or phase out total waste, hazardous waste or wastewater?
Resource usage/depletion
ENRRD01V Double Y/N
Does the company have a policy for reducing the use of natural resources? AND Does the company have a policy to lessen the environmental impact of its supply chain?
Social Employment opportunities
SODOD01V Double Y/N
Does the company have a work-life balance policy? AND Does the company have a diversity and equal opportunity policy?
Health and safety
30 Education SOTDD01V Y/N Does the company have a policy to support the
skills training or career development of its employees?
Community SOCODP0015 or SOCODP038
Y/N Y/N
Does the company have a policy to strive to
increase the indirect economic impact it has on local communities?
Does the company provide funding of community-related projects through a corporate foundation? Social impact of
products
SOPRDP016 Y/N Does the company monitor the impact of its products or services on consumers or the community more generally?
Financial
Tax WC01451 Ratio Represent all income taxes levied on the income of a company by federal, state and foreign
governments
Dividends WC04551 Ratio Represent the total common and preferred dividends paid to shareholders of the company.
